Common-law partners: What you need to know about buying a property
Published on June 22, 2023
In Quebec, commitment within a couple often involves owning property together. And though buying a house with your loved one generally means sharing the costs and responsibilities, it can also come with a number of challenges, especially in the event of a separation.
What are the rules and implications when buying property as de facto spouses? Let’s take a look at the different scenarios for purchasing property as a couple, and for transferring or buying back a share. We’ll also offer some practical tips for living together harmoniously.
Contents:
- Buying a property as common-law partners in Quebec
- Property transfer between common-law spouses
- Buying back your share of the co-owned property
- Practical advice for buying as a couple
- Good planning is the key to success
Buying a property as common-law partners in Quebec
Éducaloi defines common-law couples (or de facto couples) as two people living together for a given amount of time without being married, or living together for a given amount of time and having a child together. However, in Quebec, the concept of common-law partners differs depending on the applicable laws, organizations, government programs or pension plans. A couple can be considered to be in a common-law union in some situations, but not in others.
Did you know? According to Statistics Canada, in 2021, 43% of couples in Quebec were living common law—more than in Sweden, which is the country with the most common-law partnerships in the world.
Here are some conditions that may be decisive in the recognition of a de facto union:
- Having one or more children together (biological or adopted)
- The length of time the couple has lived together (often 1 or 3 years)
- The existence of a common life (emotional or economic bonds)
- Presenting as a couple
- The civil status of the people in the union
The rights and obligations of de facto spouses
Common-law partners do not have the same rights and benefits as couples who are married or in a civil union. In fact, a common-law spouse does not benefit from the protection of the family residence if that person does not have ownership in the property. That person therefore can’t count on the protection that stipulates that the owner cannot sell or rent the family home without their spouse’s consent. In some cases, this protection also gives couples who are married or in a civil union the right for the non-owner spouse to use the residence in case of separation.
A common-law partner also can’t count on the right to the division of property in the event or separation, or of automatically inheriting the property if the other partner dies. For a common-law spouse to be considered the co-owner of a home, their name must appear on the notarized deed of sale. That’s the law. As co-owners, you’re both responsible for maintaining the house and for paying the mortgage and taxes. Having both names on the deed of sale is also necessary to prevent one party from selling or renting the property without the spouse’s agreement.
Did you buy a property together but only one name was put on the deed of sale at the time of purchase? Don’t worry. You can go to the notary’s office to add the second name.
The financial considerations of buying as a couple
One area in which common-law spouses are on equal footing is with a Home Buyers’ Plan (HBP), which allows people to withdraw $35,000 tax-free from their RRSP to buy a first home. To qualify, the individual must not have been the owner of their place of residence over the last 4 years.
While this is an individual program, a common-law partner you’ve been living with for 12 months or more can be disqualified. If that partner has never owned property and moves into the home of their common-law spouse, they will not be able to benefit from the HBP if they decide to buy a new home together.
The same goes for the First Home Savings Account (FHSA), a registered tax-free plan that lets you save $8,000 per year (up to a lifetime maximum of $40,000) to buy an eligible first home. That’s why it’s important to plan your savings for the down payment while taking these financial considerations into account.
Protecting yourself legally and financially
The Civil Code of Québec states that upon both of you signing the deed of sale, you become equal-share owners. Since the law does not set out any obligations or protections for common-law partners, it’s important to create some for yourself. This generally involves:
- A cohabitation agreement
- An undivided co-ownership agreement
- A will
- A protection mandate
The goal of the cohabitation agreement, also known as a “de facto spouse agreement,” is to provide for, in a broad sense, the rights and obligations of each partner and the consequences of a possible separation. The format of the document is flexible. Each couple can customize it according to their needs, in compliance with the law. It can include each person’s responsibilities and contributions, as well as the individual goods and debts at the start of the couple. And, unlike with married couples, the distribution of goods or payment of money in case of break-up is at the discretion of the common-law partners. So, it’s important to include that in the contract. And, though it is legal to write the cohabitation agreement yourself (so long as it’s signed before witnesses), it’s better to consult a notary or lawyer, and to do this as soon as you buy the property. It will prevent difficult conversations if the relationship were to sour.
Then, specifically when buying a property together, common-law partners really benefit from writing up an undivided co-ownership agreement. Since both people signed the deed of sale, they both have a property right to the same real estate good. The undivided co-ownership agreement determines the rights and obligations of the couple members, specifically as regards the property. It contains:
- The amount of down payment invested by each person (and its recovery if the property is resold)
- Each person’s proportionate ownership (otherwise, it’s presumed equal)
- The pre-emptive right to the other person’s share in case of separation
- Details of agreements on the payment of property costs
- The pre-emptive right to the other person’s share
- Conditions in the event of a separation (e.g. who keeps the house?)
- Settlement methods in case of conflict (e.g. mediation)
- And more
It’s also important to have a will, to decide how each person’s share of the property will be transferred in case of death, because the common-law spouse will not automatically inherit it under the law. Lastly, preparing a protection mandate (formerly known as a proxy in case of incapacity) lets you appoint your spouse, or someone else, to take care of you and your goods, or even make decisions about the home, if you are no longer able to do so.
Each person’s proportionate ownership
You and your spouse probably don’t have the same financial resources. That’s normal. No one has the exact same life. For that reason, common-law partners often contribute different amounts to the down payment on their home. As mentioned early, under the law, the people who sign the deed of sale are considered equal-share co-owners. However, it is possible to stipulate different shares in the undivided co-ownership agreement. For instance, one member of the couple might own 40% and the other 60%, so long as it’s clearly documented. You can also decide that, if one spouse paid the whole initial down payment, the other person owes them interest in addition to half the amount.
As common-law partners, how the shares are divided between you is up to you. There are many options. Just make sure you both feel comfortable and satisfied with the situation.
Property transfer between common-law spouses
A transfer is defined as a direct, indirect or circumstantial means to pass property from one person to another. It can apply to real estate property. Generally, common-law partners will transfer a property between them through donation or sale.
Regardless of the means selected, there are many, complex legal and tax implications. Consult a tax expert, accountant, tax lawyer or tax notary to get answers to your questions about the repercussions of transferring property between common-law spouses.
Transfer via donation
How can you give your share of the house to your spouse? To cede a portion of the property to your spouse, you have the option of giving it to them for free or at a lower price than the value of half, with the intention of gratuity. This is called a donation, because the owner doesn’t receive any benefit (price or good in exchange). This must be done through a notarized act en minute, and the donation must be recorded in the land register.
In a donation, the owner is deemed to have carried out a transfer at the “fair market value” of the building. There is a legal exception to this rule when the donation is made to a married or common-law spouse. However, there is always an option to get a tax exemption under the principal residence exemption. Before making a decision about this, find out more from a tax specialist.
Transfer via sale
Legally, selling an undivided portion of a building to your spouse is equivalent to selling it to anyone else. The mortgage lender must accept the aspiring owner as a creditor. In short, the rules of undivided co-ownership still apply.
Tax-wise, you have to declare the capital gain from selling an undivided portion of the building. You might qualify for the family residence exemption, but as for a donation, you may have to pay taxes when it’s time to sell the property again. It’s therefore in your best interest to get advice from a tax law specialist before transferring via sale.
Buying back your share of the co-owned property
In the event of a new union or a separation, the solution may be to buy back a portion of the property rather than to buy a new home or sell the one you own with the ex-partner. Let’s look at the steps involved in buying back a portion of the co-owned property, as well as the financial and tax implications.
New union
Congratulations! You’ve been living in your partner’s home for over a year and you plan to become an owner. Your spouse has agreed to sell you a portion of their house rather than you paying them rent.
The first step to investing in your spouse’s house is to agree on its value. To do this, you can do an analysis of comparables, that is, analyze similar properties that have recently sold in the area. You will then have an idea of the price at which the house could sell on the market. To get a neutral, objective and professional appraisal, it’s a good idea to use the services of a professional or chartered appraiser.
Careful! Don’t rely on the municipal assessment, because it can differ from the property’s real resale value!
The next step is to go back to your mortgage lender to add the second name on the mortgage. The two spouses then become co-borrowers and will share the mortgage fees. The amount of the loan, the rate and the term will remain unchanged, so it is possible that there won’t be a penalty to pay. Also, by knowing the value of the property and the amount of the down payment initially made, you’ll know how much you have to pay to buy back a portion of your partner’s house and become a co-owner.
And lastly, to make sure both spouses have the same rights and that neither one can kick out the other in case of separation, it’s important to go to the notary’s to add the new co-owner’s name on the deed of sale. If both people have a different proportionate ownership, this must also be documented at the notary’s office; otherwise, they will be presumed to be 50% owners.
Tax-wise, the person who initially owned the property will not have to pay tax on the capital gain earned by selling a portion to their spouse. In Quebec, the principal residence exemption allows the seller of a property being used as a principal residence and “ordinarily inhabited” during all the years of ownership to benefit from a tax exemption, so long as they have owned the property for more than 365 days.
Separation
While some couples work well, others unfortunately break up. When common-law partners who own a property together separate, they sometimes opt to sell it and share the profits, if any. If an undivided co-ownership agreement and a cohabitation agreement were drafted at the time of union, these documents can serve as a reference for the division of goods, including the property.
When one of the couple members wants to keep the property (and has the means!), then it’s possible for them to buy back the other person’s share and do a mortgage transfer. This involves financially compensating the spouse who is moving out. Like with the purchase by a current spouse, the first step is to determine the property value. In a separation, it is strongly recommended to use the services of a professional to avoid disagreements on the price. It may even be advisable for each spouse to get their own appraisal and to use the services of a mediator if no agreement is reached.
To find out the property’s net value, you must then deduct the balance of the mortgage and the amount of the penalty from ending the loan prematurely. If both partners had made an equal down payment, then the amount to pay to buy back one portion will be half. However, if they invested different amounts, you have to agree on the value of the respective shares. You also have to agree on the other terms of the buy-back, like the sharing of the transaction fees, the sharing of common expenses until the transaction and the date of the said transaction.
Then, to buy back your ex-spouse’s portion, you have to get a new mortgage loan, either from the same institution or a different one. It is possible to refinance up to 95% of the property when one spouse is buying back the other spouse’s portion. Like in any mortgage loan, your income, debts and credit rating will be assessed to determine if you are eligible for a loan. Buying back the other part of the house also means becoming the sole owner, at least for some time. So you should consider all the purchase-related expenses, such as taxes, maintenance, Internet, etc.
Then, finally, you have to go to the notary’s office to remove the name of one of the owners from the deed of sale for the property. A new deed of sale will be drafted due to the transfer. However, there is no transfer tax (welcome tax) to pay if the transfer takes place within 12 months of the end of common life.
Getting advice from a notary or mortgage broker when buying back a portion from a spouse can help you make the best decisions because the operation can be complex.
Calculating the cost of buying back a share
Find out exactly how much you will have to pay to buy back a portion of a property during a new union or a separation. Be it to buy a section of the house your current common-law spouse owns, or to own the entire property you used to live in with your former partner, the calculation will use the same variables:
- Property value (as established through an analysis of comparables or the services of an appraiser)
- The amount of debt associated with the property (mainly the balance to pay on the mortgage, the penalty for breaking the mortgage contract, etc.)
- The percentage of the share to buy back (Is it half? More? Less?)
To arrive at the price of purchase, you first have to calculate the property’s net value:
Property’s market value – Debts = Net value
For example, a single-family home worth $500,000 but with a debt of $350,000 has a net value of $175,000. To become a 50% owner or to buy back 50% from your ex, you’ll have to pay them 50% of the net value, that is, $87,500.
However, it is possible that the portion to be bought back is higher or lower than half. In that case, you have to change the percentage used in the calculation. The price can be paid in cash or by transferring another good of equivalent value. It’s up to the couple to decide, or it depends on the agreement reached earlier.
Careful of the tax repercussions when paying by transferring another good! Find out more before choosing this option.
With a new union, the common-law partner who becomes the owner of a share of the house must then pay their share of the mortgage, according to the ongoing terms of payment. In a separation, the person who now owns all the rights to the property becomes solely responsible for the balance of the mortgage.
Practical advice for buying as a couple
Buying a property as a couple is a great life project. But it comes with a financial and time investment that brings its share of challenges, difficult conversations and compromises. That’s why it’s best to prepare as much as possible before buying by following these tips:
Communication
The first piece of advice is to work on communication within the couple. Talk about the different possible scenarios linked to buying a home and prepare for potential contingencies or setbacks. It’s best to lay the groundwork for buying things together while the couple is strong.
And be sure to put your cards on the table regarding your financial and debt status. It’s a token of trust and maturity and it will avoid unpleasant surprises.
Financial planning
It’s also important to prepare financially and really understand the costs involved in buying a property: taxes, maintenance, paying back the mortgage, the appraisal, the notary, etc. It’s just as important to budget for day-to-day expenses as for the unforeseen ones!
Also think about your savings. If your partner has bought back a portion of your property, why not look at your options to invest that money or put it in your RRSP or TFSA? Good financial planning will help you make the right decision.
Planning your life together
It’s a good idea to plan out some aspects of a couple’s life. Who’s responsible for paying the bills? Who’s in charge of what household tasks? How are the property maintenance costs divided?
This can involve a cohabitation agreement, which sets out each person’s expenses and responsibilities, as well as what would happen to the property in the event of a separation. In this document, you can also designate your spouse as your proxy in case of incapacity to make important decisions about the property.
It’s also a good idea to draw up an undivided co-ownership agreement, a protection mandate and a will stating who will inherit the property share.
Insurance
To protect your assets, it’s critical to have good insurance. Here are the different types of insurance for a purchase by common-law partners. Some are essential; others are to consider:
- Home insurance
- Life insurance
- Health insurance
- Disability insurance
- Mortgage insurance
Home insurance for homeowners insures your property against the most common claims, like theft, fire, water damage, sewage backup, etc.
Life insurance, health insurance and disability insurance let you protect your family from financial repercussions in case of death, illness or accident. With life insurance, you can appoint your common-law partner as the beneficiary to give them additional protection. Disability insurance protects your ability to pay back your loans, like your mortgage.
And loan insurance pays back the balance of your loan (or mortgage) in case of debt or makes the payments for you during a disability period. This reduces the burden of your mortgage in case something unforeseen happens.
Talk to a Desjardins financial security advisor to choose the best types of protection for you.
Good planning is the key to success
That covers the basics of buying a property as common-law partners. Since the Civil Code doesn’t have rules covering the family heritage of de facto spouses, it’s imperative that you create them for yourself. This will help prevent financial insecurity if things don’t go as planned.
See a legal professional, like a notary or lawyer, to make sound decisions, have the right information and plan the management of your real estate assets according to your particular situation.
And don’t forget that it’s never too late to add a name to the deed of sale or to produce the legal documents that will protect you legally and financially.
Are you looking for a house, cottage, land or building to buy with your better half? Many owners have chosen to sell broker-free.
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